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Six Months of Application of the new Planning and Construction Act

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A new Planning and Construction Act (the „Act“) came into force in the Republic of Serbia in September of 2009. There was no doubt as to the need for the enactment of a new law governing the fields of planning, construction and rights over development land, particularly from the point of view of attracting foreign direct investments. The previous law was not applicable to many situations that certain investors could find themselves in. The legal limitations did not pertain to prohibitions, but rather to the lack of provisions that would be applicable to certain situations and facilitate each stage of construction, from planning to completion of the investment project. The new legal solutions are an attempt, in the midst of the global economic crisis, at increasing the competitiveness of Serbia in the field of attracting foreign investments and creating a more favorable legal climate for investors in the future.

Thus the Act facilitated and hastened the procedure of rendering plan documents* (Art. 46-Art. 53 of the Act) and issuing building permits (Art. 134- Art. 140 of the Act). On the other hand, the Act did not fully regulate rights over land (Art. čl.96-Art.109 of the Act) which will cause the main problem in the future application of the Act.  

At the time of enactment of the Act, development land in the Republic of Serbia is, for the most part, state-owned. Apart from the state’s right of ownership over the land, there is also right of use thereto. Such right of use was being awarded by the competent authorities of the Republic of Serbia to socially-owned companies for the purpose of construction. This right of use rights could not be transferred, and certain investors used privatization procedures and by purchasing the capital of socially-owned companies acquired control over those privatization subjects with awarded right of use over land and being the (sole) potential investor in a specific location. In the period prior to enactment of the Act the Serbian public saw frequent media attacks on the government and investors that used privatization of socially-owned companies to acquire land on attractive locations; hence the need to resolve this problem. These factors that contributed to the lack of functionality and the deficiencies of the previous law influenced the legislator to enact a new law, with provisions that strive to resolve most of the uncertainties in the field of planning, construction and rights over development land. Immediately upon coming into force, the new Act caused various reactions, but the general impression is that the future application of the new Act will depend on the by-laws the enactment of which the Act itself provides for.

Today, six months after the application of the Act began, a small number of by-laws have been enacted, but their content indicates that there is no clear vision regarding the manner of application of the new Act. The number of issued building permits has in practice decreased as compared to the period prior to enactment of the Act, and this is a direct consequence of the fact that the Act and the newly enacted by-laws are not yet comprehensive and leave a number of open issues in the domain of their application.

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The greatest challenge in the application of the Act is the future application of provisions relating to the conversion of right of use into right of ownership. Namely, the Act provides for the possibility that entities registered as holders of right of use over state-owned land shall, after a conversion procedure, become owners of the said land (Art. 100-Art.108 of the Act). Since according to the provisions of the new Act a building permit can only be obtained by the entity registered as owner (or lessee) of the land on which the building is to be constructed (Art. 135 of the Act), it is clear that the conversion of the right of use into right of ownership is a prerequisite for submitting an application for obtaining a building permit, i.e. for obtaining the right to build.

The main problem in the application of the Act, as was the case with the previous law, is in the absence of a clear solution to the problem of rights over development land.

As has already been mentioned, development land is for the most part owned by the Republic of Serbia, while users of development land can be various entities, among which are those that are or used to be socially-owned companies. The Republic of Serbia became owner of the land through nationalization that was conducted immediately after WWII during the period of socialism (Law on Nationalization of Rental Buildings and Development Land, Official Gazette of FNRY 52/58). The state subsequently awarded such nationalized land to socially-owned companies to use, for the purpose of development and conducting business activities. Thereby granted right of use could not be transferred and this fact was always the main obstacle for further development, due to the fact that the users that were unable to build were not entitled to sell the right of use to the land to an entity interested in development. Interested investors resolved this problem in various manners. Most frequently this was achieved through a privatization procedure (Privatization Act, Official Gazette of RS No 38/2001, 18/2003 and 45/2005), i.e. through the purchase of socially-owned capital in a socially-owned company that holds right of use over the land in the desired location. In this manner the investor would become the controlling shareholder in the company holding the right of use over the development land, thus being able to develop the location over which the controlled company was registered as user.

By enactment of the Act right of use ceased to be sufficient for obtaining the construction permit, except in certain limited cases. Therefore the holders of right of use over the land are forced to undertake conversion it they wish to build on a certain location. An entity holding right of use over land faces problems in the Act immediately, in the initial stage of the investment project, namely in the conversion procedure. The lack of detailed provisions in the Act governing the right to conversion is a consequence of the fact that the legislator did not bear in mind that right of use have existed for over fifty years in the legal system of the Republic of Serbia. During this lengthy period of time this right changed, was interpreted in various manners and therefore had different qualities. Moreover, the land itself changed, being subjected to divisions, merging, development and other actions that can cause all sorts of legal situations. Therefore, in the majority of cases, an additional interpretation of the general legal provisions governing the right and the manner of conversion is necessary in order for these provisions to be applicable to the specific case. In the application of the legal provisions on conversion so far the public real estate registers, as the authorities in charge of conducting the conversion procedure, have avoided interpreting the legal provisions governing conversion in the fear of making a mistake and establishing right of private ownership over land that was state-owned up until the conversion. Conversion has so far been conducted only if the Act can be applied to a specific case without additional interpretation.

New owners of companies that underwent privatization are faced with an additional problem. Their companies are entitled to conversion, but against consideration for the market value of the land (Art. 103 of the Act). Towards the end of February a decree was enacted which set forth criteria and measures for determining the consideration for conversion and the conversion procedure in such cases (the “Decree”). The purpose of this Decree was to regulate and clarify the procedure of converting right of use into ownership rights against consideration. Inter alia, the Decree stipulated that the consideration for the conversion shall be determined as the difference between the market value of the land at the time of conversion and the purchase value of the land (the consideration paid in the privatization procedure or in some other procedure that brought about the acquiring of the right of use – Art. 3-5 of the Decree). As did the Act, the Decree also left matters unresolved and possibilities for various interpretations remain to exist, due to a fact that it did not take into account all the manners in which entities could have directly or indirectly acquired right of use over land. The issue of the purchase value of land in cases of acquiring a controlling share in a socially-owned company through capital increase or purchase of a majority share packet remains open, as does the issue of sanctions should the conversion fail to be conducted within the period of time stipulated by the Act.

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The rendering of the Decree also invoked a reaction of the part of the public interested in restitution of nationalized land, and there are indications that some provisions of the Decree will be subjected to assessment of compliance with the constitution and legislation before the Constitutional Court of the Republic of Serbia (Art. 59-Art. 65 of the Law on the Constitutional Court of the Republic of Serbia, Official Gazette of the Republic of Serbia No 109/2007), which will additionally hinder and limit the application thereof.

The said problems regarding converting right of use into right of ownership are preventing the application of the Act even in the part that can indeed be considered good and innovative, i.e. in the part relating to the spatial planning and development of buildings (issuing building permits etc.). Regardless of the fact that the procedures and deadlines for issuing the necessary approvals during building have been shortened and facilitated, these procedures cannot be implemented since it is mostly necessary, prior to commencement of building and entering into that stage, to complete the conversion of right of use into right of ownership.

The incompleteness of the regulations governing the conversion of right of use into right of ownership, the unfamiliarity of the public real estate registers with the conversion procedure and unwillingness of the officers of the state conducting the conversion to interpret the rules set forth by the Act and the Decree, cause the conversion to be a procedure very difficult to conduct.

The idea of the legislator to, finally, renounce the outdated and anachronous right of use as a relic of socialism is a good one, but the meager provisions of the law and unclear by-laws are limiting the conversion to rare cases, and therefore preventing the application of the other provisions of the Act and rendering them senseless.

The hope remains that the difficult practical implementation of the Act will serve as a warning to the competent authorities in the Republic of Serbia, and that we will soon have more comprehensive and more precise by-laws that will facilitate the conversion procedure and make it easier both on the interested parties, and on the governmental administration itself.

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